Twelve: Monopolistic Competition: The Competitive Model in A More Realistic Setting

chapter twelve
Monopolistic Competition: The Competitive Model in a More Realistic Setting
Prepared by: Fernando & Yvonn Quijano
2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick OBrien1st ed.
CHAPTER 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
Starbucks: Growth through Product Differentiation

After studying this chapter, you should be able to:
1 Explain why a monopolistically competitive firm has a downward-sloping demand curve. Explain how a monopolistically competitive firm decides the quantity to produce and the price to charge. Analyze the situation of a monopolistically competitive firm in the long run. Compare the efficiency of monopolistic competition and perfect competition. Define marketing and explain how firms use it to differentiate their products. Identify the key factors that determine a firms profitability.
LEARNING OBJECTIVES
the coffeehouse market is monopolistically competitive, rather than perfectly competitive.
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Monopolistic Competition: The Competitive Model in a More Realistic Setting
Monopolistic competition A market structure in which barriers to entry are low, and many firms compete by selling similar, but not identical, products.
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1 LEARNING OBJECTIVE
Demand and Marginal Revenue for a Firm in a Monopolistically Competitive Market
The Demand Curve for a Monopolistically Competitive Firm

12 - 1
The Downward-Sloping Demand for Caffe Latts at a Starbucks
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Marginal Revenue for a Firm with a Downward-Sloping Demand Curve
12 1 Demand and Marginal Revenue at a Starbucks
CAFF LATTES SOLD PER WEEK (Q) 0 1 2 3 4 5 6 7 8 9 10
PRICE (P) $6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00
TOTAL REVENUE (TR = P x Q) $0.00 5.50 10.00 13.50 16.00 17.50 18.00 17.50 16.00 13.50 10.00
AVERAGE REVENUE (AR TR/Q) $5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00
MARGINAL REVENUE (MR = TR/Q) $5.50 4.50 3.50 2.50 1.50 0.50 -0.50 -1.50 -2.50 -3.50
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12 - 2
How a Price Cut Affects a Firms Revenue
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12 - 3
The Demand and Marginal Revenue Curves for a Monopolistically Competitive Firm
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How a Monopolistically Competitive Firm Maximizes Profits in the Short Run
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Maximizing Profit in a Monopolistically Competitive Market
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What Happens to Profits in the Long Run?

How Does Entry of New Firms Affect the Profits of Existing Firms?
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How Entry of New Firms Eliminates Profits
Dont Confuse Zero Economic Profit with Zero Accounting Profit

2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick OBrien1st ed. 9 of 19

How Does Entry of New Firms Affect the Profits of Existing Firms?
12 2 The Short Run and the Long Run For a Monopolistically Competitive Firm
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12 - 1
The Rise and Fall of Apples Macintosh Computer
Macintosh lost its differentiation, but still has a loyal if small following.
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12 - 2
The Short Run and the Long Run for the Macintosh
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Is Zero Economic Profit Inevitable in the Long Run?
A firms profits will be eliminated in the long run only if the firm stands still and fails to find new ways of differentiating its product or fails to find new ways of lowering the cost of producing its product.
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12 - 2
Staying One Step Ahead of the Competition: Eugne Schueller and LOral
Unlike many monopolistically competitive firms, LOral has earned economic profits for a very long time.
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Comparing Perfect Competition and Monopolistic Competition

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Comparing Long-Run Equilibrium under Perfect Competition and Monopolistic Competition
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Comparing Perfect Competition and Monopolistic Competition

Excess Capacity under Monopolistic Competition The profit-maximizing level of output for a monopolistically competitive firm comes at a level of output where price is greater than marginal cost and the firm is not at the minimum point of its average total cost curve. How Consumers Benefit from Monopolistic Competition Consumers benefit from being able to purchase a product that is differentiated and more closely suited to their tastes.
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12 - 3
Abercrombie and Fitch: Can the Product Be Too Differentiated?
Did Abercrombie and Fitch narrow its target market too much?
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How Marketing Differentiates Products
Marketing All the activities necessary for a firm to sell a product to a consumer.
Brand Management
Brand Management The actions of a firm intended to maintain the differentiation of a product over time.
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What Makes a Firm Successful?

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What Makes a Firm Successful?
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Midnight Snack
Figure 1: Product differentiation shifting the demand curve for a monopolistic competitor
Figure 2: Spreading the overhead
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Brand management Marketing Monopolistic Competition
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Twelve: Monopolistic Competition: The Competitive Model in A More Realistic Setting

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chapter twelve

Monopolistic Competition: The Competitive Model in a More Realistic Setting

Prepared by: Fernando & Yvonn Quijano

Starbucks: Growth through Product Differentiation

the coffeehouse market is monopolistically competitive, rather than perfectly competitive.

Monopolistic Competition: The Competitive Model in a More Realistic Setting

Demand and Marginal Revenue for a Firm in a Monopolistically Competitive Market

The Demand Curve for a Monopolistically Competitive Firm

Demand and Marginal Revenue for a Firm in a Monopolistically Competitive Market

CAFF LATTES SOLD PER WEEK (Q) 0 1 2 3 4 5 6 7 8 9 10

Demand and Marginal Revenue for a Firm in a Monopolistically Competitive Market

Demand and Marginal Revenue for a Firm in a Monopolistically Competitive Market

How a Monopolistically Competitive Firm Maximizes Profits in the Short Run

What Happens to Profits in the Long Run?

Dont Confuse Zero Economic Profit with Zero Accounting Profit

What Happens to Profits in the Long Run?

What Happens to Profits in the Long Run?

Comparing Perfect Competition and Monopolistic Competition

Comparing Perfect Competition and Monopolistic Competition

How Marketing Differentiates Products

What Makes a Firm Successful?

Figure 2: Spreading the overhead

Brand management Marketing Monopolistic Competition

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